TAB 203 From: Kornfeld, Warren Sent: Wednesday. November 29, 2006 4:55 PM To: Lee, Edmund Cc: Kanef, Michael; DiRienz, Mark; Teicher, David Subject: FW: 2007 Budget Presentation importance: High Here are our edits: TMD 2006 writeup 2.doc Hw?Original From: Lee, Edmund Sent: Tuesday, November 28, 2006 11:41 AM To: DiRienz, Mark; Teicher, David; Kornfeld, Warren; Eisbruck, Jay; Kanthan, Kumar; Stesney, Linda; Kn?egler, Andrew Knapp, Susan Cc: Kanef, Michael Subject: 2007 Budget Presentation Importance: High Dear all, We have been advised that Miohaei will be presenting the 2007 AFG Budget this week. To prepare for that meeting, Michael is looking for some commentary similar to what was submitted last year with respect to Best and Worst case scenarios and Competitive Issues for each of your business lines. Please ?nd attached what was submitted last year- TMD 2006 Writeup.doc Revenue growth rates submitted in 2nd Pass of the 2007 Budget (applied to 2006 revenue forecast) is as follows: RMBS 45% ABS 10% ABCP 5% Latin America 13% Canada 13% Please submit your write?ups to me by 10am tomorrow so that may consolidate for Michael's review. Call me if you have any questions. Thanks Edmund Confidential MDYS ADCB M79238 Edmund Lee Asset Finance Group Moody's Investors Service 99 Church Street, New York, New York 10007 (212) 558-1055 edmund.lee@moodvs.com Confidential MDYS ADCB 1179239 BEST AND WORST CASE SCENARIOS COMPETITIVE ISSUES RIWBS Best Case: 0% 0 Deal volume ?at for 4 months then 10% fewer number of deals due to lower origination volume for 8 months. Could result if banks hold fewer mortgages in portfolio, or if mortgage rates don?t increase, or home prices appreciate beyond expectations or if percent of affordability products expands or if market share decreases. 0 Market coverage stable in all sectors (vs. base case assumed some regression to historical trend in Prime and decline in subprime due to continued market pressure/rating shopping observed in 2H 2005). Less pressure on coverage if competitors? home equity standards tighten, certain investors have indicated that they think the competitors are too lenient today. 0 Full implementation of pricing increases Worst Case: '30% decrease Subprime deal volume down 10% 1H 2006 then down 20% 2H 2006, prime deal volume down 20% in 2006 to 2004 levels 0 Lower originations, esp. if long?term rates increase to create a more normally- shaped yield curve or if home prices dr0p in certain areas, in particular California 0 Derivative deals could extract product from term RMBS market 0 Market coverage in Prime drops an additional toward historical average, and market coverage in Subprime drops 3% or so 0 Due to rating shopping as a result ofcost cutting/earnings demand of issuer/originators I 0 Possibly exacerbated if gains by new rating agencies 9 Additional risk if GSE market share increases 2005 Bill would have increased GSE loan limit in California NY Competitive issues: - DBRS on some deals but not many 0 Seems to have used pricing as an entry point criticized in street research for having too low loss expectations in subprime Moody?s has had some whole deals, and many morejunior bonds, shepped away from us in the subprime sectOr CDO bid cited as Opening RMBS market to less-rigorous agencies 0 Outreach good (issuer brie?ngs, teleconlbrences well attended, publications generate many calls) but possibly under resourced. Competitors host off?site brie?ngs in vacation locations, and have much larger staffs overall. Confidential MDYS ADCB 3179240 TERNI ABS Best Case: +15% increase 9 Better than expected closing rate for high revenue Other ABS deals. 0 Increased use of Rating Advisory product a Credit card receivables increase as opportunity to refinance in the home equity market disappears 0 Ford and GM corporate downgrades lead to more sccuritization volume from them Worst Case: 40% decrease a Worse than expected closing rate in high revenue Other ABS deals. a Credit card consolidation leads to reduced issuance of America) and more issuers moving to frequent issuer pricing 0 Ford and GM problems cause investor concern in the auto market which widens spreads and makes deals less economical for issuers Unexpected elements of new student loan legislation makes securitization less advantageous for issuers Competitive Issues: a Entrance in ABS could create competition for deals?Has not been observed yet, possible impact currently believed to be Small 0 Increased use ofFIPs reduces revenues in standard asset ciasses-Was issue in 2005, no new requests received in 2006 to date, potential impact should be low 9 Increasingly aggressive structures in new asset classes could create pressure to change standards to maintain market share-Currently able to maintain leadership position in these assets which creates need for Moody?s ratings, Many of these deals are wrapped so Moody's and ratings are necessary for these deals?Impact could moderate if other agencies reduce standards and if investors are willing to purchase these deais without a monoline wrap 0 Tobacco settlement market is competitive and only requires l~2 ratings with Moody's currently rating these deals lowest?Moody's position is this market was regained in late 2005 but could he lost again i'Fthere is an adverse legal decision or ifmoves to one rating i?narket In.) Confidential MDYS ADCB 1179241 ABCP Best case: +75% increase 0 New deals are over weighted in first half allowing us to recognize some revenue (speci?cally quarterly fees) during the second half of the year New deals continue to outpace terminations Outstandings continue to grow and revenue bene?ts from revised upper bound cap Moody's is able to pick up one of the conduits that we. don't currently rate (96% market share leaves a small oppty for this to occur) Worst case: 0% 0 Lose existing and new deals to competition (one deal went out with a rating due to a credit issue that we are investigating) 0 Front loaded terminations in 2006 with terminations outpacing new deals 0 Loss of revenue from long term risk assessments and seller additions if the market slows down 0 Decline in ABCP outstandings as a result of credit issues slowdown resulting in lower warehousing amounts, corporate credit problems, or is a program extended for some reason. Competitive issues: a Credit standards are tested as DBRS and Fitch aggressively target market share impact would be to walk away from business if it does not make sense only seen in the "repo" conduit space 0 Fee issues some issuers complain about fees - 1 don?t think this will have a large impact as we should be comparable (all?in fees) to others 0 Need to be timely with responses to credit proposals want to keep existing business and encourage new business 0 Research products need to be upgraded and more research published - just another reason to use Moodys Confidential MDYS ADCB 1179242